2Fall 2011Focusing QuestionEllen is 35 years old, and she has decided it is time to plan seriously for her retirement. She plans to start saving $10,000 in a retirement account at the end of each year until she is 65.How can Ellen find out how much she will have saved when she is 65?

4Fall 2011Learning Objectives1.Calculate the present value of a perpetuity. 2.Using financial calculator, calculate the present value of an ordinary annuity and an annuity due.3.Using financial calculator, calculate the future value of an ordinary annuity and an annuity due.4.Compute the PV of a growing perpetuity.5.Compute the number of periods, or amount of the regular cash flows in a loan or investment.6.Compute the internal rate of return of a series of cash flows, given the present or future value of the cash flows.

8Fall 2011AnnuitiesAn ordinary annuityis a stream of N equal cash flows paid at regular intervals, with the first CF starting one period from now.Unlike a perpetuity, an annuity ends after some fixed number of payments

9Fall 2011PV of AnnuitiesExample 4.7Plan:Construct the timeline of option (a)Compute how much the cash flows are worth in today’s dollar.Compare with option (b) PV?

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